What Is the Typical Wage Replacement Rate?

A key question in retirement planning is how much of your income you’ll need to replace once you stop working. This figure, called the wage replacement rate, is a helpful retirement planning tool. It helps you estimate how much to save and what kinds of income sources to rely on. While everyone’s situation is different, some general benchmarks can help guide your planning. 

Working with a financial advisor can help you create a long-term strategy based on your financial goals and risk tolerance.

Also known as an income replacement rate, this metric refers to the percentage of pre-retirement income you need each year to maintain your current standard of living. Most financial planners recommend targeting a replacement rate of about 70% to 80% of your pre-retirement income. This estimate assumes that certain costs—like payroll taxes, retirement contributions and housing—will likely decrease after retirement.

However, the ideal wage replacement rate can vary based on individual circumstances. Planning for travel or high medical expenses may require a higher replacement rate. Conversely, if you plan to downsize your lifestyle significantly, a lower rate may be sufficient.

Several factors can influence how much of your pre-retirement income to replace.

• Spending habits: Your desired retirement lifestyle plays a huge role. Those who plan to travel frequently, maintain multiple homes or continue supporting family members may need a higher replacement rate.
• Investment strategies: Aggressive or conservative investment approaches can affect your available income in retirement. For example, a more aggressive portfolio could increase your future income but comes with higher risk.
• Other income sources: Other types of retirement income, such as Social Security, pensions, rental income, part-time work and annuities, can all maximize your retirement savings. This may reduce how much you need to withdraw from your portfolio.